As we approach the end of 1998, a few days still remain for taxpayers to make adjustments in their tax picture to reduce the pain experienced on April 15, 1999. For many taxpayers as much as one-third of every dollar goes to pay income taxes. Accordingly, every untaxed dollar contains a real bonus.
Consider the following year-end tips:
- Pay deductible business or personal expenses before year-end. Paying by credit card in 1998 yields a deduction for 1998 even though the credit card bill will not arrive until mid to late January. (This applies to bank cards only, not to seller-backed cards.) Checks mailed anytime before the end of December also qualify.
- To the extent possible defer receipt of income until just after December 31, 1998. This tip applies mostly to small business owners who can exercise some control over the timing of the receipt of income, such as by postponing billings. For calendar year taxpayers income received on January 1, 1999, is not reported until April 15, 2000.
- Try to mail your January mortgage payment to your mortgage lender during 1998, so that the interest portion is included in your year-end statement and deductible against 1998 income.
- Consider establishing a Roth IRA. To be eligible, married persons generally must have adjusted gross income of less than $150,000. While the contribution is made with after-tax dollars, income on growth of the Roth IRA is tax-free if the compliance rules are followed.
- If you are going to make charitable contributions anyway, try to make them before December 31. This includes both cash and contributions of property. Get receipts and statements of value to support your deduction.
- If you anticipate being underwithheld for 1998, thus being at risk for an underpayment penalty on April 15, try to prepare a pro-forma tax return to determine the amount of your underwithholding. It may still be possible to have your employer withhold additional taxes before year-end and avoid the penalty. Withholding from wages is treated as having been withheld in level increments over the year even where a substantial amount comes out of your final paycheck.
- Gather your receipts and records for 1998 now instead of waiting until April 14, 1999. Not only will this help you in planning before year-end, it will also avoid mixing up records with 1999 transactions.
— Denise Turner